Auditor-General’s Report on 1MDB: 1MDB’s debt ballooned within five years of operation

This article first appeared in The Edge Malaysia Weekly, on May 21, 2018 - May 27, 2018.
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THE recently declassified Auditor-General’s Report on 1Malaysia Development Bhd (1MDB) reveals that the strategic development fund’s debt and interest expenses increased rapidly.

In a short period of five years, from 2010 to 2014, it accumulated 17 non-inherited loans (nominal value) amounting to RM42.88 billion, 14 long-term loans totalling RM39.06 billion and three short-term loans/financing of RM114 million, according to the report, which was declassified last Tuesday. However, the amount received from the 17 loans was only RM39.17 billion, versus RM42.88 billion raised.

1MDB had to depend on borrowings to sustain its ongoing concerns because it only had a share capital of RM1 million.

As at Oct 31, 2015, its outstanding loans and financing stood at RM55 billion — domestic borrowings of RM12.65 billion, foreign loans of RM34.93 billion and inherited loans of RM7.43 billion.

The auditor-general says 1MDB needs at least RM42.26 billion to pay its principal sum and interests on its loans (maturing between November 2015 and May 2039), based on the assumption that no new loans were taken after October 2015 and that its rationalisation plans were implemented.

The report, by the National Audit Department, notes that a debt repayment of RM4.88 billion was made in 2016. Two other major repayments will be in 2023 (RM14.74 billion) and due 2039 (RM5.14 billion).

On top of that, 1MDB needs at least RM1.52 billion annually to repay other loans between November 2015 and May 2024.

If it fails to settle its whopping debt, the Ministry of Finance will have to step in, given that some RM20.31 billion of its debt is guaranteed by the government.

“The government is responsible for discharging obligations of loan agreements, bonds, promissory notes and other instruments made by government companies in the event that the companies fail to meet their obligations,” reads the report.

Since 2009, two government guarantees have been granted for the financing of Islamic medium-term notes (IMTN) of RM5 billion to 1MDB (maturing on Nov 11, 2039) and a Pertubuhan Keselamatan Sosial loan of RM800 million to 1MDB Real Estate Sdn Bhd (maturing on Oct 10, 2022).

The report says the 30-year IMTN have a yearly coupon rate of RM287.50 million. Therefore, 1MDB’s commitment for the IMTN would be RM11.9 billion — a principal sum of RM5 billion and financing cost of RM6.9 billion.

In addition, the government had provided a letter of support to 1MDB Global Investments Ltd for the issuance of US$3 billion notes with Goldman Sachs as the arranger.

Another 1MDB unit, Timeline Zone Sdn Bhd, took a US$150 million loan from EXIM Bank Malaysia.

“With the issuance of the letters of support and in the event of a default, the government will only be liable to settle the obligation after the company has used all its internal funds for the repayment of its debt,” says the report.

Further, the government also issued financial aid, called standby credit, of RM950 million to Plenitude Mentari Sdn Bhd. This was in the form of short-term loans and drawdown.

 

1MDB cannot pay off massive debt with assets

1MDB’s assets have been growing annually since 2009 with the most significant increase in 2013, according to the report, rising 363% to RM44.14 billion from RM9.53 billion in 2012. The assets included two independent power producers, real estate investments, bank balances and deposits with Aabar Investments PJS Ltd.

In 2014, the fund’s assets grew 16% to RM51.41 billion with the acquisition of another independent power plant and investments in portfolio funds.

The report notes that as at March 31, 2014, 1MDB’s assets, which included available-for-sale investments, intangible assets, investment properties, properties, plants and equipment as well as lease and service concession receivables, amounted to RM51.41 billion.

From 2010 to September 2015, 1MDB acquired six properties, namely the Tun Razak Exchange land (RM302.38 million) for the development of an international financial centre; Bandar Malaysia land (RM368.72 million) for an integrated development; land in Air Itam, Penang (RM1.06 billion) for the development of affordable housing and other projects; two 100-acre parcels in Alor Gajah, Melaka (RM39.5 million) for the building of a new power plant; 260 acres of land in Kuala Ketil, Kedah (RM65 million) for a 50mw solar power project; and 318.4 acres of land in Pulau Indah, Selangor (RM344.24 million) for the development of a power plant.

From 2012 to 2014, 1MDB invested RM12.07 billion in three independent power producers, namely Tanjong Energy Holdings Sdn Bhd (RM8.5 billion), Mastika Lagenda Sdn Bhd (RM2.34 billion) and Jimah Energy Ventures Sdn Bhd (RM1.23 billion).

 

 

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